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Question

AL inc., sold 2000,000 of 10%, 10 year bonds at 104 on january 1, 2004.The bonds were dated jan1,2004 and pay interest on july 1 and january 1,if Al uses the straight line method to amortize bond premium or discount, determine the amount of interest expense to be reported on july 1 and december 31, 2004.

Answer 1

When the bonds were issued,

Dr  Cash $2,080,000 ($2,000,000 x 104%)

Cr  Bonds premium $80,000

Cr  Bonds payable $2,000,000 (always face value)

10-yr bonds with semiannual interest payments mean 20 interest periods. Using straight-line basis, the premium will be amortized over 20 periods, i.e. $4,000 each period

Interest expense to be reported on july 1 and december 31, 2004:

Interest payable in cash : $2,000,000 x 10% x 6/12 = $100,000

Interest expense = Interest payable - Amortization of premium

= $100,000 - $4,000 = $96,000